Abstract

We perform a careful spectral analysis of the correlation structuresobserved in real and financial returns for a large pool of long-lived UScorporations and find that financial returns are characterized by strongcollective fluctuations that are absent from real returns. Once the excessivecomovement is subtracted from individual financial time series, thebehaviour of real and financial returns is virtually identical in both thecross-sectional and time series domains, thereby demonstrating the inherently collective nature of excessive fluctuations. Put differently, if excessvolatility is to be reduced, then one would do well to inhibit excesscomovement first. At any rate, the excessive behaviour in volatility andcomovement should no longer be studied in isolation of each other.